Tuesday, February 16, 2016

"The Economics of Drone Delivery"

This is a guest post. The views expressed here are solely those of the author and do not represent positions of IEEE Spectrum or the IEEE. This post was originally published at the Flexport Blog.

The latest version of Amazon's Prime Air delivery drone.

Two years ago, Jeff Bezos promised that Amazon would soon deliver packages by drone. “I know this looks like science fiction,” the Amazon CEO told Charlie Rose on “60 Minutes” as he stood with several Amazon drones. “It’s not.”

Bezos’s primetime announcement sparked a lot of interest—and a media consensus that it was a publicity stunt to get Christmas shoppers thinking about Amazon. After all, federal law prohibited commercial drones from flying over populated areas, and airplanes were already experiencing close calls with hobbyists’ drones.

But the drone community is not acting like the prospect of delivering packages by drone is a pipe dream. Amazon just released an update of its Prime Air program. Executives at Google Wing claim they will deliver packages in 2017 via drone. Walmart has asked the Federal Aviation Administration for permission to test drone delivery, and venture capitalists have invested in drone delivery startups.

So what makes the drone community believe deliveries are a good idea? Assuming the technology works, do the economics make sense?

The Drone’s Milk RunDrone deliveries look like the future: unmanned quadcopters rapidly delivering packages to our doors, eliminating both wait times and the cost of human labor.

But from an economic perspective, it’s easy to see how drone delivery could be an elegant technological solution in search of a problem.

That’s because the economics of last-mile delivery are driven by two factors: route density and drop size. Route density is the number of drop-offs you can make on a delivery route, often called a “milk-run” in industry parlance. Drop-size is the number of parcels per stop on the milk run.

If you make lots of deliveries over a short period of time or distance, the cost per delivery will be low. Likewise, if you drop off lots of parcels at the same location, the cost per parcel will be low..Drones perform poorly on both of these economic aspects of last-mile delivery. The current prototypes that companies have unveiled usually carry just one package, and after the drone makes its delivery, it has to fly all the way back to its homebase to recharge its batteries and pick up the next package.

Compare that to the current status quo: delivery trucks. A delivery truck from UPS makes an average of 120 stops a day to deliver hundreds or thousands of packages. Don’t they seem to be better than drones?

How Short-Distance Drone Deliveries WorkLast November, Amazon released a slick video demo of Prime Air, a drone delivery system designed to “get packages to customers in 30 minutes or less.” It comes on the heels of a similar production from Google’s Project Wing, which showed a drone delivering dog food in Queensland, Australia.

Both these companies and others say they expect to be flying soon.

We approached these companies’ claims with skepticism. After all, in Amazon’s demo, a drone that the company says can fly 15 miles delivers a pair of soccer shoes. But what if you don’t live within 7.5 miles of an Amazon warehouse? And will Amazon keep drones on standby for when you order 50 pounds of diapers? Drone delivery is still speculative, and Amazon and co. aren’t revealing all their plans. But a few simple statistics show that distance and weight may not hold back drone delivery....MORE